Friday, November 19, 2010

How Do You Save Money for a Replacement Car?

1:51 AM |

One of the biggest financial responsibilities people face is car ownership and the associated costs.  I would gather the majority of folks don’t save up enough cash to go out and pay for their first car straight from their wallets.  Rather, they find the best used or new car deal they can and settle in for 4-5 years of payments.
After the car is paid off, they either repeat the process, or choose to drive it for several more years.  Even those who choose to drive it longer at some point face the decision of car payments or saving enough to pay cash for their next car.
Personally, my wife and I don’t have car debt and we’d like to keep it that way.  But, that means we’re going to have to start saving a lot more money on top of other financial savings and investing goals to avoid car payments when our cars eventually need replacement.

How do you save money for a replacement car?

Before discussing saving for a replacement car, there are a lot of things we can do to insure our next car is affordable.  We should also look for ways to minimize the amount we have to save each month so that we can work on other financial goals such as investing for retirement or building an emergency fund.  In general, there are few ways to minimize the amount of money you’ll pay over the long-run for cars.

Buy used.


Used cars are almost always several thousand dollars cheaper than new cars.  A well kept used car 2-3 years old can be almost as nice as driving a brand new car off the car lot and a good portion of the value has already depreciated.

Buy quality.

When I say buy quality, it doesn’t mean you have to buy a luxurious vehicle full of all the latest gadgets.  Rather, buy an affordable and economical car that has a good track record for low maintenance costs and can be driven well over 100,000 miles.
A great example is the Honda Civic.  Many people have been able to get 200,000 miles out of their Civics.  Driving a car this long helps avoid a replacement car every 5 years.  With a quality car, you may be able to go 10 years before getting a replacement car which creates more opportunity to work on those other financial goals and minimize the need the car savings required each month.

Meet your needs.

Of course, buying used and quality help reduce the amount you have to save each month.  But, another important tip is to buy cars based on your specific needs and not fall into the trap of buying based on what others have.   Do you need an SUV when it’s only you and your spouse and you are only using the car for city driving?

Create room in your budget

Once you’re committed to following these guidelines, the rest of the story is about creating room in your monthly budget for car replacement savings.
I thought it might be helpful if I use my current situation as an example to share what’s going to be required.  Here are the facts:
  • We are driving two cars today.
  • We have a Chevy Tahoe with approximately 100,000 miles and a Honda Civic with approximately 80,000 miles.
  • Both are paid off and neither have any major mechanical problems to our knowledge.
By most standards it would be time to find replacement cars because of the 100,000 mile anxiety (feeling you need to buy another car when your car reaches 100,000 miles).  But, this level of mileage is perfectly fine for us because we know these cars have good track records for quality.
Let’s pretend we have 5 more years of driving life on our Tahoe and we average about 12,000 miles per year.  So, our Tahoe will have another 60,000 miles on it before it needs to be replaced which brings the end-of-life total to 163,000 miles.  Note:  I think we can get more miles out of it than 163,000.
All this being said, we can estimate we have 60 months until we need to buy a replacement car.  Let’s pretend we won’t get any money for the Tahoe and we need a similar used replacement car for $18,000 after the 5 years is up.  That would mean we have to save $300 per month.  In other words, we have to make a car payment to ourselves until we have enough to buy the replacement car.

Can your car replacement savings goal be met?

So, back to our question…can saving for a replacement car be accomplished on top of other savings goals?  If a family has no debt and a well established emergency fund, I think it is highly possible!
Here’s the general approach:
  • Take action and begin saving now
  • Saving should be based on priorities.  Build up an emergency savings fund first.  How much emergency savings do you need? Consider at least 3 months of expenses.
  • Reallocate your emergency savings to car replacement when the emergency savings goal has been met.
But, you said this would only work if you are debt free and have an established emergency savings fund.
Frankly, yes.  It gives you the best chance of success.  Just remember, no situation is perfect.   You may very well have to experience car payments again until you can break the cycle.  But, if you do, minimize the expense and opt for as cheap of a car as possible.  In other words, don’t by a $10,000 car when you can get by with a $5000.  Keep it cheap (and safe) until you can break the cycle and pay cash.
Overall, be patient.  Part of being a good personal money manager is not having a perfect financial situation, but taking steps in the right direction.
How do you plan to save for your replacement car?

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